Salvaging the Green Climate Fund

Mike Callaghan & Barry Carin

Lowy Institute & CIGI

08/04/2015

With a goal of developed countries mobilizing jointly USD 100 billion per year by 2020 to address the climate change needs of developing countries, the United Nations Framework Convention on Climate Change (UNFCCC) established the Green Climate Fund (GCF) as its financial mechanism. According to the UNFCCC a significant share of the putative new multilateral funding for adaptation was intended to flow through the GCF.

The good news is that following a recent round of pledges, as at end 2014 the total amount pledged to the GCF was USD 10.14 billion. The bad news is that the prospects of the GCF being the main source of mobilizing the needed amount of climate change financing remain poor. What has been pledged is not an annual amount. It includes money to be distributed over a number of years - the US pledged $3 billion to be distributed over four years. And they are only pledges. Congressional Republicans are unlikely to appropriate the money pledged by the US.

The GCF faces several challenges:
• It is only one of many funds. A recent count listed eighteen other multilateral climate funds, in addition to six bilateral funds.
• It has too many bosses. The Fund is governed and supervised by a 24 member Board that is split evenly between funders and recipients. The Board is to receive guidance from the Conference of the Parties (COP). The COP is notorious for inability to reach consensus except for the lowest common denominator.
• The funding is anything but “new, additional and predictable”.
• The GCF has been given too many incommensurable objectives, including capacity building, technology transfer, preparation of national reports by developing countries and promoting gender equity.
• Mitigation and adaptation are two different business

The GCF has confronted many difficulties in settling its design, scope, governance and operational details. Much remains to be negotiated. Agreements between developed and developing countries have been strained, resulting in some complex and inflexible arrangements. Given its current path, it is highly unlikely the GCF will be the main source of international climate change financing. Either changes will be required to the GCF, or new approaches will be needed. But there are lessons as to what is required.

The GCF has illustrated the need for a detailed budget before soliciting financial contributions. Countries should not be asked to commit funding without any specific idea of how the money would be spent. The GCF put the cart before the horse. The GCF would be more successful raising the funds if there was more detail on how the proceeds would be disbursed. In other words, a pre-approved project pipeline.

The US is expected to provide about 30% of the funding. This will require overcoming the objections of some powerful American constituencies. Interest groups will be motivated by self-interest; they must see substantial benefits accruing to them. This will be achieved if proposed projects identify beneficiaries (e.g. contractors, firms, universities and research labs) from the expenditure of the funds. One way around Republican objections would be to establish trust funds to be spent on research in the US, with results to be open source and patent-free.

The criteria for assessing and ranking funding applications need to be clarified. First, the differences between mitigation investments and adaptation projects need to be recognised. Obviously funding of adaptation projects would be directed to the developing countries where the adaptation takes place (the BRICS should be explicitly designated as ineligible). But for mitigation options, particularly in the research area, the benefits for developing countries (and the global impact) may be maximized if the money is spent in developed countries with the most promising research facilities. The results should be provided free to developing countries.

Second, to avoid windfall gains, procedures need to be implemented to ensure funding only of activities that would not take place in the absence of the international financing support.

Third, an appropriate discount rate needs to be applied to maximize the expected present value of dollars invested.

While the GCF has gained some momentum in recent months, it will fall well short of what is required. Rather than waiting for the GCF to hit a brick wall, now is the time to learn from the experience to date and work around the constraints. Inertia around the UNFCCC may preclude changes to the GCF. If so, alternative and more flexible approaches to mobilizing climate change financing will be required.

Mike Callaghan is a non-resident fellow at Lowy Institute and chaired T20 in 2014.